Investment Corporation of PNG v Pora and The State [1993] PNGLR 45 (4 October 1991)

PAUL PORA, MINISTER FOR FINANCE AND PHYSICAL PLANNING, AND THE INDEPENDENT STATE OF PAPUA NEW GUINEA

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TAXATION - Stamp Duties Act - Company title dwelling - Transfer of shares and registered subleases - Purchase of share capital - Share sale agreement nominated principal instrument for stamp duty assessment - Transfer of shares stamped with ad valorem duty - Agreement for sale assessed for duty under s 46 of the Act at 5% of total consideration - Whether duty be assessed on total consideration for transfer of shares as real property or as transfer of marketable securities - Stamp Duties Act Ch 117 s 46, Div 9.

REAL PROPERTY - Company title dwelling - Transfer of shares and registered subleases - Taxation of.

The applicant, a company, purchased share capital of Sunset Apartments, consisting of 15 residential units. The Articles of Association of Sunset Apartments Pty Ltd, the company that owns Sunset Apartments, provide that ownership of particular shares entitled the owner to exclusive use of a particular unit in the building with the right to sublease. The applicant executed contracts with various vendors to purchase the whole of the share capital of Sunset Apartments Pty Ltd. The share sale agreement was nominated as the principal instrument for assessment of stamp duty.

The transfers were stamped with ad valorem duty and the agreement for sale was assessed for duty under s 46 of the Stamp Duties Act as an interest in property at a rate of 5% of the total consideration. The applicant paid under protest and subsequently appealed from the decision. The question raised was whether duty should be assessed on the total consideration for the transfer of shares as if such agreement for sale falls within the terms of s 46 (as real property) and is, thus, assessable at 5% or, as argued by the applicant, the rate of 1% as provided for by Div 9 (dealing with transfers of marketable securities).

1. A share confers on the holder no legal or equitable interest in the assets of the company; it is a separate piece of property. Charles v Federal Commissioner of Taxation [1954] HCA 16; (1954) 90 CLR 598 at 609. Nowhere can the owner of a share, for instance, demand that the company transfer to him an indefeasible title to a particular unit. Were it so, such a transfer would, on its face, be such an instrument envisaged by s 46(1).

2. The property cannot be subdivided in a manner envisaged so as to provide an identifiable portion, and the share of the property company does not confer a right on such shareholder to call for a transfer to him of a particular part of the assets of the company. For these reasons, pleading the agreement for sale of shares in equity, in these Courts, cannot afford a plaintiff any help, were he to seek orders conferring on him an interest in land to the extent of an indefinitely continuing right to occupy a particular unit. Thus, there is no basis in law to say that the predominant purpose of the agreement and associated documents is to transfer an interest in real property.

3. The agreement for sale of shares is not an instrument that has the effect of conferring an indefinitely continuing right to occupy any real property. That right is provided for in the Articles of Association and not in the agreement.

4. Section 46(1) cannot catch a share transfer and give it an entirely different cloak. It is the Articles of Association which determine the legal and equitable rights of the shareholder, thus conferred by share ownership.

6. On the face of the document, the transfer of shares falls within s 1(1) as a transfer of marketable security and, accordingly, attracts duty at the rate of 1% of the consideration.

BROWN J: The applicant is a company which purchased the share capital of another company called Sunset Apartments Pty Ltd. This latter company was the proprietor of land registered as State Lease Volume 1 Folio 126 Port Road Granville West Port Moresby upon which had been erected 15 residential apartments, or units. These units were known as Sunset Apartments. The articles of association of Sunset Apartments Pty Ltd provided that ownership of particular shares entitled the owner to exclusive use of a particular unit in the building with a right to sublease. Sunset Apartments may, in common parlance, be called a "company title dwelling". There is no strata title ownership provided for by legislation in Papua New Guinea, and apart from joint ownership, whether as tenants in common or joint tenants, company title affords the principal method for ownership of such high rise or unit blocks.

The applicant on 8 November 1988 executed contracts with various vendors to purchase the whole of the share capital of Sunset Apartments Pty Ltd. Pursuant to that contract, appropriate transfers of shares and transfers of registered subleases were also signed. The share sale agreement was nominated as the principal instrument for stamp duty purposes, and on 15 November 1988, under hand of N Bogan, the Local Assessor of Stamp Duties, an assessment of stamp duty issued. The transfers were stamped with ad valorem duty and the agreement for sale was assessed for duty pursuant to s 46 of the Stamp Duties Act Ch 117 at the rate of 5% of the total consideration, in the sum of K102,286.20. This amount was paid under protest. The agreement for sale was completed on 1 December 1988. On 11 January 1989, the applicant, through its lawyer, by letter, advised the Minister for Finance and Planning (the Minister responsible for administration of the Act) of the applicant's intention to appeal against the assessment and sought that he state a case setting out the basis of the assessment for duty for this Court's consideration and determination.

The applicant, by originating summons filed on 13 January 1989, claimed against the first respondent, the honourable the Minister Paul Pora, an order quashing such assessment and substituting the assessment of duty on the share transfer documents calculated in accordance with Div 9 of the Act and s 16 of the Act, dealing with transfers of marketable securities. Further, the applicant asked that the contract for sale be assessed under s 6 of Schedule 1 at K6.00 each and the sublease transferred under s 15 at K6.00 each.

The applicant claimed, in effect, a refund from the second respondent of the difference between the sum actually paid and that lesser sum which the applicant claim, is its proper liability by virtue of such substituted assessments which it seeks. The question in issue, then, is whether duty should be assessed on the total consideration for the transfer of shares as if such agreement for sale falls within the terms of s 46 (as real property) and is, thus, assessable at 5%, or, as argued by the applicant, the rate of 1% as provided for by Div 9 (dealing with transfers of marketable securities).

Before dealing with the question, I wish to turn back to the originating summons, where the applicant sought orders of this Court pursuant to s 21 of the Stamp Duties Act.

(1) [Appeal] Where, in relation to an objection under Section 20A, a person is dissatisfied with the decision on the objection, he may, within 60 days of the date of service of the notice under Section 20A(2):

(b) for that purpose require the Collector of Stamp Duties to state and sign a case setting out the basis of the assessment.

(2) [Collector to state case] When required to do so under subsection (1), the Collector of Stamp Duties shall state and sign a case accordingly and deliver it to the appellant.

(3) [Set down for hearing] On the application of the appellant, the appeal shall be set down for hearing.

(4) [Collector to be notified] As soon as the appeal is set down for hearing, the appellant shall give notice of that fact to the Collector of Stamp Duties.

(b) assess the duty and penalty (if any) that the Court considers to be chargeable."

Subsections (1), (2) and (4) reproduced above had been amended by Act 26 of 1988, operative 1 January 1989, so that these proceedings have been incorrectly entitled in the name of the Minister who had, by the amendment, been replaced by the Collector of Stamp Duties (hereafter the Collector) as the appropriate respondent. The State is not properly joined in these circumstances, the Collector having been named in the Act as the appropriate authority. Nevertheless, I propose to deal with the proceedings as they stand, directing that such pleadings be read as Collector of Stamp Duties wherever reference is made to Paul Pora or the Minister or, for that matter, the State. It has been my experience that promulgation of amending legislation leaves a lot to be desired and, since the agent for the Collector has not taken the point but filed a case stated on 26 September 1990, I consider the appropriate order is to grant leave to all parties to dispense with strict compliance with the National Court Rules, so that the issue or question on appeal may be heard. The National Court Rules provide for taxation appeals in O 18 Div 2 but are silent over appeals in accordance with s 21 of the Stamp Duties Act. In the circumstances, a summons for directions upon lodging an appeal would be appropriate.

The stated case by the Collector, after reciting the lodgment of documents giving rise to the assessment, asserts that such transfer is "of an interest in property, not on (sic) the transfer of marketable securities". The pertinent points are in pars (5) to (8);

"(5) The Collector of Stamp Duties based his assessment on the transfer of an interest in property, not on the transfer of marketable securities.

(6) The Collector of Stamp Duties relies upon the provisions in the Memorandum and Articles of Association of the company whose shares are the subject of the transfer.

(7) The Collector of Stamp Duties relies upon the fact that the company conducts no business other than to hold one parcel of land developed as multi-storey residential units, the entitlement to each of which is attached to a specific parcel of shares.

(8) In Papua New Guinea the only means for transfer of multi-storey real property is by way of entitlement to ownership and possession by ownership of a specific parcel of shares."

I propose to treat the applicant's summons as an appeal sufficient for the purposes of the statute under s 21 and the respondent's case as that set out in the Collector's document.

The appellant's grounds shall be those pleaded in the originating summons, whereby he says the Collector erred in law in relying on s 46 when, on the factual situation which is agreed, assessment should have been arrived at by treating the documents on their face, as transfers of "marketable securities" under Div 9 of the Act.

Miss Weigall, the Collector's agent who had the leave of the Court to appear in this instance, argued that the purchase of such shares gave the purchaser an indefinitely continuing right to reside in the premises and, thus, had the effect of transferring an interest in property. She said that such an absolute right to exclusive possession, whilst a shareholder, was an incident which could be categorised as an interest in property, and that category was caught by s 46(1) of the Act.

(1) [Definition] For the purposes of this section, "agreement" includes an instrument that has the effect of:

(b) conferring on any person an indefinitely continuing right to occupy any real property.

Miss Weigall says that the Agreement for Sale of Shares is, thus, within the definition of s 46(1)(b).

But nowhere in the instrument itself does it confer or have the effect of conferring an indefinitely continuing right to occupy any real property. That right is provided for in the articles of association of the target company. It is not conferred by the agreement. The operative part of the agreement relates to the sale of shares and deals with all necessary incidental matters in that regard to effectuate such transfer.

No authority has been advanced to support Miss Weigall's assertion that the agreement effectively transfers an interest in property. I cannot agree with her. "A share confers upon the holder no legal or equitable interest in the assets of the company; it is a separate piece of property". [per Dixon CJ, Kitto and Taylor JJ; Charles v Federal Commissioner of Taxation [1954] HCA 16; (1954) 90 CLR 598 at 609)].

Nowhere can the owner of a share, for instance, demand that the company transfer to him an indefeasible title to a particular unit. It is just not possible. Were it so, such a transfer would, on its face, be such an instrument envisaged by s 46(1) in one form or another. What Miss Weigall seems to be arguing disregards the ordinary laws of property, for the betterment of the Collector. Section 46(1) in my view cannot catch, as it were, a share transfer and give it an entirely different cloak. It is the articles of association which determine the legal and equitable rights of the shareholder thus conferred by share ownership, not the agreement submitted by the Investment Corporation for stamping. Pleading that agreement, in equity, in these Courts cannot afford a plaintiff any help, were he to seek orders conferring on him an interest in land to the extent of an indefinitely continuing right to occupy a particular unit. Firstly, the land or property cannot be subdivided in such a manner as envisaged, for instance by strata titles legislation, so as to provide an identifiable portion. Secondly, as I have said, the share of the property company does not confer a right on such shareholder to call for a transfer to him of a particular part of the assets of the company (Charles case). Thus, Miss Weigall's assertion that the predominate purpose of the agreement and associated documents is to transfer an interest in real property has no basis in law.

Mr Andersen says that the transfer of shares clearly falls within s 1(1) as a transfer of a marketable security, and clearly on the documents face this is what they are. They, accordingly, attract duty at the rate of 1% of the consideration in the sum of K20,456.60.

Again, he says that the transfer of the various leases is governed by the Act's Sch 1 s 15(a) and points to the share sale agreement as evidence of the consideration for the transfer being not money, but entry into the share sale agreement. I am satisfied that under Sch 1 s 15(a) the proper duty is K6.00 per transfer, totalling K18.00. So the three agreements for sale, under seal, should either bear the total duty of K20,456.60 or, as suggested by the applicant, since the transfer of share documents may properly be stamped with that amount, attract duty at the rate of K6.00 each, a total of K18.00. The total duty payable is K20,492.60, made up of the foregoing.

The phrase "has the effect of" relates to the instrument. It is not apposite to say a change in the beneficial ownership of the land results from the instrument, for those reasons I have already stated. Similarly, the instrument does not confer on any person an indefinitely continuing right to occupy real property.

To do away with the anomaly relating to the different rates of duty caused by the effect of the law relating to company share holdings (Charles v Federal Commissioner of Taxation supra) coupled with the effect of land law in precluding a suit for specific performance which may lie in other circumstances in a purchaser seeking to enforce the change of beneficial ownership of land pursuant to a contract for sale, special legislation was passed by the New South Wales Parliament as recently as 1987. The Stamp Duties (Amendment) Act subjected instruments effecting the sale or transfer of shares in a company title dwelling to duty at the conveyance rate. The amending bill clearly referred to the previous advantage company title unit purchasers had over other land purchasers, more particularly strata title unit purchasers, by virtue of the lower share transfer duty rate.

But, as I say, strata titles legislation is unknown in Papua New Guinea. Stamp duties legislation cannot be used, as it is sought to be used in this instance, to alter the substantive law as it affects landownership or share transfers.

If the legislature considers that the anomaly warrants legislative correction, then it may seek to pass amending legislation affecting the Stamp Duties Act - legislation which varies the incidence of duty on sale or transfer of shares in a company title dwelling. There is no need to delve into the convoluted nature of the New South Wales amending act division dealing with acquisitions of company and unit trust interests dutiable as conveyances of land, but such amending division is directed at varying the incidence of duty in these circumstances. It does not affect relationships created by instruments between parties. It does specifically deal with the situation where there is acquisition by a person of a land use entitlement attaching to a particular share, ie. the company title situation. In other words, legislative correction was necessary to vary the incidence of duty on the transfer of company title share holdings.

In this case, it seems the Collector is seeking this Court's assistance in deeming what is clearly not an instrument conferring an interest in real property as such an instrument for the purposes of s 46(1) of the Stamp Duties Act.

Nowhere is there any deeming provision to support the Collector's wish. Mr Andersen further says that, as a taxing statute, the burden of proof is on the respondents to show that such duty as assessed is lawful. For the foregoing reasons, I am not satisfied the burden has been discharged.

(b) That the following assessment be substituted in lieu of the assessment of the first respondent:

(i) the share transfers shall be assessed as transfers of marketable securities under Div 9 of the Act and s 16 of Sch 1 of the Act at 1% of the consideration of the sale of the shares, being an amount of K20,456.60;

(ii) the agreements for the sale of shares shall be assessed under s 6 of Sch 1 of the Act at K6.00 each;

(iii) the transfers of the subleases shall be assessed under s 15 of Sch 1 at K6.00 each.

(c) The stamp duty levied under the assessment of this Honourable Court shall be discharged from the moneys paid by the applicant to the first respondent pursuant to the assessment of the first respondent.

(d) The second respondent shall pay to the applicant the sum of K81,721.60 (sic) and interest thereon from the date of payment by the applicant to the first respondent of the stamp duty assessed by the first respondent.

(e) The second respondent shall pay the appellant's costs of, and incidental to, this application.

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Papua New Guinea Law Reports

Investment Corporation of PNG v Pora and The State [1993] PNGLR 45 (4 October 1991)

PNG Law Reports 1993